Archive for category Valuation
Invest or Not in a new fuel
Posted by Steve in 14 Point List, Pitch, Valuation on December 23, 2009
In Sunday NY Times (Dec 6, 2009, pg 2) there is an article titled KLM Tests a Biofuel That’s Made From Weeds.? They are using Camelina oil as part of the fuel to run a Boeing 747. The question is: Should you invest in Camelina Oil?
What would be the first questions?
1. What is the economic advantage? Is it more efficient or cheaper or both?? Not mentioned in the article.
2. How safe is it? This is being tested according to article.
3. Who is producing it? Not mentioned but a Google search can find it.
4. What is the likelihood of it being picked up as a fuel? No idea.
5. What is the investment target?? Companies producing it, the oil or seed itself, or companies using it?
6. Finally, if it is patentable, who has it?
Lots of questions.? From the point of this blog, the best bet may be to invest in a company producing it. Why? It will be the efficiency of production, conversion, and delivery that will make this a viable fuel.? The seed can be grown in many locations by a variety of people.? Too much competition there. Assume the fuel can be used by anyone, it would only decrease the costs of that business by a fraction.
The real win is in the producer and deliverer of the oil.? The exit plan would be to go public or get acquired by another energy company.? The two key entry criteria would be an existing customer and demonstration by the company that they can deliver; or at least their managers have the experience of delivering on their promises.
A point I am making is that the methodology described in this blog is the ability to quickly evaluate an opportunity and determine if you should spend the due diligence on a deep dive.??I would look at the 14 points and see how well it fits and then make the recommendation.? If it passes all 14, I would only recommend this if I was looking at a viable concern.?? Oh, and one more thing, if the investor has experience in energy then I would make it positive; but if they are not experienced in energy, then I would suggest they get some before they invest.
First Ascent Ventures final say on Microseed accelerators
I really suggest this website, especially for these three articles on microseed accelerators. In their last article on the subject, they look at the success rate. Without going into the detail I recommend you read the article; they recommend that you seek out the accelerators if that fits your business model.
The only drawbacks they point out is the unwillingness of some entrepreneurs to part with 6% of stock for 25k. The reality is that this is not a tremendous amount of money, but at the same time, you are more likely to get this funding, which in turn will make you more likely to get later funding through their contacts. This investment typically values a company at $416,000. However, with the next level of investment you can value a company between $2,000,000 and $8,000,000; meaning that another 25% to 50% stake can get you $500,000 to $4,000,000 in more working capital.
Until you have been through the rounds trying to get money or working with VCs considering money you do not realize how hard it is to get investment. By lowering the barriers to getting investment (smaller dollars, willingness to take on higher risk) microseed accelerators could be opening the doors to a lot more entrepreneurs to get investors. At the same time the accelerators are providing tangible benefits of training and contacts. Translate contacts into future sales.
My only concern is on the investor side: is the risk to return ratio good enough for the microseed accelerators to make money. Right now, its too early to tell, but I hope to address this at least theoretically in a future post about this subject.
Shark Tank or License Tank?
Which is a better deal for your business?
Offer 1: $35,000, the investor owns 100% of your business, and you get a 2% royalty.
Or
Offer 2: $50,000, the investor owns 51% of your business.
It depends on your belief on whether you will be successful or not with your own business or you should do a licensing deal. Offer 1 was a licensing deal.
Last night I watched about five minutes of an ABC show called Shark Tank. A regular group of investors review pitches from entrepreneurs and they offer a deal right there. Whether or not they consummate a deal depends on negotiations later but the deal offers are in good faith.
The owner of turbobasters.com was pitching her business. You can visit the web site to see it. She was given the two offers. She chose offer #1 because the investor had the network to get her product sold. 2% of something was better to her than 49% of nothing.
I stopped watching. Instead, I started doing my own little due diligence on the internet, visiting her website, texasstartups.com, and the show website.
A few things came up:
1. She does not have a working prototype. All she has are some drawings and a good idea. No business plan, or marketing plan. However, she may have mentioned that on the show.
2. The show does not do any business due diligence; only background checks.
3. Evidently other inventors get on there and instead get an offer to license their product.
As one poster put it succinctly on the texasstartupblog.com: some of these people have no business running a business…they are much better off licensing their product. In this case, the lady took the right deal between the two, if it really was a license.
As for my thoughts on the show; I have not watched enough of it. I do wan to point out one idea: This is on TV so it is supposed to be entertainment and there is a big difference between that and what investors do make sure they make a solid deal.
Quick note:
Offer 2 valued the business at $98,000. Offer 1 said the business was worthless and it was just the idea that was valuable. Big difference.
Sources of Funding
The following is a general list of sources of funding.
Funding in this case is defined as increased cash (the working capital) in your company.
The list follows the following three groups: sell more product, borrow money, or sell pieces of itself. That list is too vague, so in the effort of making a it bit more real, I constructed the below.
1. Yourself – put your own money in.
2. Personal credit cards – very high rate of interest, but easy to get cash.
3. Loan on personal collateral item – second mortgage, pawn a car/boat/jewelry. Very risky and you could lose your goods.
4. Line of credit from bank – typically has fees whether it is used or not, reduced if you carry a large balance and have a good relationship with them.
5. Sell products – (increase cash flow) you sell products and reinvest the profit back into your own company.
6. Sell off business – sell part of your business or the contracts
7. Factoring – advance against receivables
8. Advance Against Royalties/Against Contracts
9. Accept Credit Cards – accepting credit cards on average increases a business by 35%!
10. Merchant Cash Advance – a loan against future income not realized by a contract
11. Friends and Family – get them to put their own money in. It can be a gift, loan, or stock purchase.
12. Loan from bank – includes collateral loans, SBA-backed loans.
13. Grant – government or private sponsor to either do research, or provide funds to a need category
14. Private Placement Memorandum using a reg d wholesaler – selling securities in your company via a person who represents your company to financial advisers (they sell the securities) who in turn find investors
15. Angel investor – private investor who uses their own money
16. venture capital investor – private/public investor who uses third party money
Items 1 to 3 do not require you do convince anyone of the viability of your company or products. You only have to spend your own money, or have a valuable item you are willing to collateralize.
Item 4 is typically not a problem if you have decent financials. It becomes more of a problem if you want to negotiate out of your fees or lower your interest rate, but you do not have to convince someone that hard about
Item 5 now gets into the area of convincing others to buy your product. This is the most basic but does involve improving your budget management and taking less money for personal gain.
Item 6 is actually a lot more common in certain industries. You have steady customers in one arena, but while steady they probably will not grow. Why not sell off the future business and get that cash up front? This can be easy or difficult depending on the industry and mix of customers.
Items 7,8 and 10 typically are only used when the business is doing well and needs to increase their working capital. You do not have to work that hard to convince someone to do this but just have the right type of business and financials. Item 10 sometimes requires to you to already accept credit cards but in other cases you may be able to get cash against contracts.
Item 9 sounds simple but its hard for a new business to get credit cards. If they do then it will be more costly, and most likely require a personal guarantee.
Item 11 now gets into the realm of convincing others to bet on the future with you, without collateral. This is the focus of this blog. The first step is get friends and family who already know you and ideally, believe in you.
Item 12 is difficult. Banks will not loan to start-ups but they will loan against someones financials (because they personally guarantee the loan).
Item 13 is getting a grant from the government or some private entity. Takes time, money, and the ability to know the right people. This actually may take longer than any other category.
Item 14, 15, and 16 now getting into the realm of selling securities in your company to strangers. While Item 11 was selling a security (maybe) it was to someone that knows you. Each of these requires work.
Items 12-16 definitely require a business plan.
As you can see, there are at least 16 different ways you can raise money for your business to expand. I tried to put it in the rank of easiest to hardest, but there would be a lot of argument on that.
Asking for additional money – use a reserve
I met a film maker on a flight this week and we talked about his project proposal. He is funding his film himself but also seeking angel investors. The total amount he is seeking is $125,000 and he plans to market it via some traditional channels in the film industry.
Independent films are marketed primarily by the distributors and require little dollars from the film makers. Typically, the budget only covers making the film and a few expenses related to getting it into distribution. However, some filmmakers do include a marketing budget as they plan on taking the film to festivals. This film-maker plans on applying for many film festivals and hopes to get into a few. Some festivals may fly him there, but overall there will be some expenses.
The question is whether he should include the travel dollars in the budget. This may be logically sound but he pointed out that an additional $25,000 was an increase of about 20%. Would the investors shy away? Is there enough difference between $125,000 and $150,000 that would cause investors to say no at the higher amount? His point was that for the targeted investors this was a big difference.
He may be right. For some of his target investors $125,000 may be a stretch; they may use fund raisers. A additional $25,000 could crater the idea. However, I think it’s a matter of how you pitch it.
The other problem is that most investors expect to see marketing expenses. They know that without marketing then there are little chances of getting their money back and make a profit.
One idea is to propose a budget that is $150,000 but that $25,000 of that is targeted for a marketing reserve with specific points on where it might be used. If that money is NOT used, then it would be immediately paid back to the investors. In reality you could pitch it as $125,000 plus a reserve of $25,000 that would be only be used for X and paid back in a year if it is not used.
In conclusion, my recommendation is that you do need to include a marketing budget (or a contingency budget), but it could be presented as a reserve. This reserve is not used unless needed. It can be paid back immediately and not count towards shares (%ownership) but that really depends on what is negotiated.
Angel Investors vs. Venture Capitalists
Posted by Steve in Capitalization, Introduction, Valuation on March 31, 2009
I was asked, “What is the difference between Angels and VCs?”
Angel and venture capitalist investors differ in size of investment and business structure. However, they both use similar criteria for qualifying a company.
Angel investors typically invest up to one million dollars individually, or eight million dollars as a group. Obviously, this could be more, but above eight million, you typically end up talking to VCs. Angels use their own money (or family funds) and do not have a charter of rules to follow. Angels are only answerable to themselves (and of course, their family).
Venture capitalists invest from about two million dollars to as high as two hundred million dollars, depending on the size of the fund they raise. They manage funds composed of investments from individuals, companies, and other managed funds (i.e. Fireman’s Fund). The largest fund to date is by Oak Investment at $2.56 billion dollars. VCs have a charter of rules they must follow, and are answerable to these investors.
Both angels and VCs have a targeted amount they invest. Startups should target angels and entry level VCs (or startup VCs) because the size of the investment would be typically under eight million dollars.